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How Does The Age Of The Business Affect The Asking Price

The Question

I have a business that sells used tractors, and equipment. I want to sell the property, the inventory, office, and name. I want to receive $170,000 for the inventory, $700,000.00 for the land, and there is a rental on the property with an income of $1000.00 a month, if this property is included the price is increased $200,000.00. My question for you is: I have been in business for over 30 years, and do not know what to charge for that. I believe there is a percentage per year to figure. Can you help me, exactly how do the years in business effect the price?

The Answer

You are on the right track in that you are pricing the inventory and the land separately from the rest of the business.

However, trying to place a value specifically on the fact that you have been in business for 30 years would not be the best way to demonstrate the value of your business to a buyer. Let’s say we are looking at two businesses that are similar in every way, except that one business is 15 years old and has been losing money the last few years and the second business is only 3 years old but is very profitable. Buyers will pay much more for the younger business in this example.

To determine the value of you business over and above the value of the land and inventory I would apply the concept of "Owner’s Benefit". The formula for determining the owner's benefit is: Annual Pretax Profit + Owner's Salary + Owner's Perks/Benefits + Interest + Depreciation. This number will show the buyer exactly how much money the business has been generating you, the owner. And since their interest and tax payments will be different than yours, you want to add tax and interest payments back into the total owner's benefit number. From there the buyer can make their own estimates of what their interest and tax payments will be. To be as accurate as possible, I suggest you figure your owner’s benefit for each of the last three years and use the average of those three years as you actual owner’s benefit amount. But the key concept here is that the Owner's Benefit is the amount of money + benefits the business generates for the owner. And since the prospect is buying the business in order to get that money and benefits, that is where any valuation must start.

Retail businesses are commonly price by taking the owner’s benefit and multiplying it times a factor of 1.5 - 2.5. (This number is called, "the multiple") This is where your 30 year track record would come in. An older, more established and stable business can use a higher multiple - in this case 2.5. However, you may have to lower the multiple some if sales and profits have declined in recent years.

So your 30 years in business do matter when it come to valuing your business, but to a buyer the most important thing is: How much does the business currently generate for it’s owner. I hope this has helped.

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